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The mutual fund industry has designed many different load structures. You usually get to make a choice about how to take your load, even within the same fund, because many load funds offer several different classes of shares.
Class A shares have a front-end load; Class B shares have a back-end load. Class C shares have small, if any, front or back loads, but they have a steady annual 12b-1, or level load.
The four types of mutual fund loads -- front-end,
back-end, level and no-load -- are described here.
Trying to decide between buying a load versus a no-load mutual fund? Read "Buying mutual funds: load or no-load?."
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Types of mutual fund loads |
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Select one of the tabs to view the information on the types of mutual fund loads.
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Associated
with
Share Class B.
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Definition
A back-end load is a charge assessed when you sell your shares, calculated as a percentage of the value of the shares you're selling. The percentage often declines gradually, so you might pay 8 percent if you sell in the first year, 7 percent in the second, etc., until it eventually goes to zero.
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Advantages
The full value of your investment goes directly into the fund. If you have $7,500 to invest, $7,500 will go to work for you and begin earning returns from day one. (This is in contrast to the A shares, from which a sales charge will be deducted before the investment is made.)
Class B shares often convert to Class A shares after a period of time (commonly six to eight years) with all the related benefits. Once they convert, your 12b-1 fee goes down and your load or exit fee disappears.
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Disadvantages
Higher management fees and higher 12b-1 fees than A shares or C shares.
Breakpoints are not available, so even a large investor cannot avoid paying the load on Class B shares.
Limited flexibility when it's time to get out. This could pose a problem in an unexpected family or medical emergency when you are forced to liquidate some investments sooner than anticipated.
The disincentive to sell when the time is right because of high exit fees can be the most costly penalty of all. Remember the tech bubble? Imagine if you were holding Class B shares then.
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Beware
Although you don't pay this back-end load until you leave the fund, the fund managers pay your broker right away. He gets a hefty commission the day you buy the fund, the same as if you had bought Class A (front-loaded) shares. This means there's a strong incentive on the part of the fund to earn back that money as fast as they can. This is one reason for the large annual fees you start paying as soon as you buy the fund.
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Tip: Note decline in popularity
B shares generally have gone out of favor in recent years. They can be very costly, they limit your flexibility and many people complain of a lack of transparency, finding it difficult to get a handle on the real costs.
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When to buy back-loaded funds
When you know you want to stay in for a long time. If you definitely want to hold this fund for eight years or more, in most cases you will end up paying no exit fee (back-end load) and no sales fee (front-end load). After that eight-year period, you will own Class A shares, exactly like your fellow investors who initially bought A shares. The difference is the A-share owner will have lowered the initial amount of his investment because he had to pay a chunk of it up front in the sales load. Will you be better off than him? That depends on the difference in your 12b-1 fees and other annual expenses during the period that your shares were treated as Class B. Try to do this calculation before you buy the fund.
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